5 Best Cyclical Stocks to Buy in December 2021

2021 has been a mixed year for cyclical stocks. While they looked strong for a large part during the year, there has been some selling pressure in the last couple of months.

Along with the uncertainty caused by the omicron variant of the COVID-19 virus, concerns over the 2022 economic growth outlook have taken a toll on cyclical stocks. The Fed has also hastened its tapering plan and looks set for a rate hike sometime next year. What are the five best cyclical stocks that you can buy in December 2021?

1. Caterpillar (NYSE: CAT)

Caterpillar is among the best cyclical stocks to buy for 2022 looking at the continued momentum in all the key end industries that it serves. CAT would also be among the beneficiaries of the $1 trillion infrastructure bill. The company has a diversified business and the constructions sector is the biggest revenue contributor, followed by energy and transportation. The Resources industry accounts for around 20% of its revenues. In terms of geographical breakdown, North America accounts for little less than half of its sales, making it a play on the continued momentum in the US economy.

JPMorgan finds CAT a top cyclical stock for 2022

JPMorgan has listed Caterpillar stock as a top pick for 2022. “We believe Caterpillar’s earning power and free cash flow conversion over this upcoming cycle, supported by solid global GDP growth, continue to merit our Overweight rating,” said the team of JPMorgan analysts. The brokerage expects CAT to benefit from the uptrend in the US construction industry and what it called a multi-year mining supercycle. Cowen also echoed similar views earlier this year and said that it sees a “megacycle” for Caterpillar for only the second time in modern history.

If you are looking to add a cyclical stock in December 2021, CAT is one name that you should be watching. The stock’s valuations also appear reasonable considering the strong growth outlook.

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2. Deere (NYSE: DE)

Deere is another cyclical stock that looks like a good buy in December 2021. Deere released its fiscal fourth-quarter 2021 earnings last month. Along with the earnings beat, its guidance for the fiscal year 2022 also sounded impressive.

The company sees an almost 15% increase in demand for large agricultural equipment in the US in the fiscal year 2022. In Europe and South America, it expects growth of around 5% while it is forecasting a flat market for Asia.

Overall, the company expects its net income to be between $6.5-$7 billion in the year. This would mean another record year for the company after posting a record profit of $5.96 billion in the fiscal year 2021.

Goldman Sachs has listed Deere as a top idea for 2022

Goldman Sachs has listed Deere as a top idea for 2022. “Beyond the cycle, we expect 2022 to mark the year when the industry increases its focus on the ~$54 bn TAM from Precision Ag as yield improvement and input cost reductions accelerate amid a broadening product cycle for the industry, and Deere in particular with upcoming analyst day event the key focus, and with AGCO benefiting as well,” it said in its note.

The medium-term outlook for DE stock looks positive amid the current farm supercycle. The long-term outlook looks strong too as farmers in emerging markets also turn to modern equipment. The stock trades at an NTM PE multiple of 15.4x which makes it an attractive cyclical stock to buy in December.

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3. Freeport-McMoRan (NYSE: FCX)

Freeport-McMoRan stock has whipsawed in 2021. However, the stock has recovered from its 2021 lows and is up 44% for the year, which is nearly twice that of the S&P 500. The company is among the largest copper miners globally. Copper is a cyclical commodity and many call it “Doctor copper” for its ability to predict economic cycles.

Also, copper is a play on the electric vehicle transformation given the high intensity of copper in electric and hybrid stock. If you are looking to play the EV transition, FCX looks among the best ancillary stocks.

Goldman Sachs expects copper to rise further amid cyclical recovery

Goldman Sachs which correctly predicted prices hitting $10,000 per metric ton now sees copper prices hitting $15,000 per metric ton. Bank of America is also very bullish on copper and cites the current supply deficit and low inventories to support its bullish thesis. Within the copper space, FCX is among the best cyclical stocks to buy.

Notably, over the next two years, FCX would ramp up both gold and copper production which would support its earnings. Its unit cash costs would also come down as it ramps up the Grasberg mine in Indonesia. Overall, FCX looks like a good cyclical stock to buy in December 2021.

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4. Lennar (NYSE: LEN)

The home building industry is also cyclical in nature. While the Fed has increased the pace of tapering and has signaled as many as three rate hikes for 2022, the US housing market is looking strong. Within homebuilders, Lennar looks like a good play for 2022. Goldman Sachs is also bullish on the stock and listed it as a top pick for 2022.

Goldman Sachs sees LEN as a good cyclical stock for 2022

“As such, we look for further upside across our homebuilding & building products coverage, with company-specific strategies and selective industry dynamics driving individual stock outperformance,” said Goldman Sachs in its note.

Lennar stock has been in an uptrend and up almost 48% for the year. Looking at the strength of the US housing market, it looks like a good cyclical stock to buy in December 2021.

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5. Chevron (NYSE: CVX)

The energy industry is also quite cyclical in nature. Oil prices have come off their 2021 highs amid the omicron scare. The release of oil from strategic reserves by countries like India and the US has also helped bring down prices. However, most brokerages are bullish on Chevron in the energy industry.

CVX is a good buy in the cyclical energy industry

Chevron has taken a disciplined approach towards capex and has a strong balance sheet. If you want to play the cyclical energy industry through a relatively low beta name, CVX would fit the bill. The stock has underperformed energy peers in 2021 and looks set for a catch-up trade next year.

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